The deal is stuck on whisky and a few other issues. India and the UK have been negotiating an FTA since January last year, when they had set the Diwali deadline to seal the deal. Both the countries have recently concluded the ninth round of FTA negotiations with detailed discussions across a range of policy areas.
One of these is whisky imports to India. The UK wants lower tariffs on its Scotch whiskey but Indian whisky makers fear that would hurt their business.
The tariff trouble
The UK has proposed that India cut the import duty on Socth whiskey from 150% to 75% immediately at the signing of FTA, and thereafter to 30% over a period of three years. While Indian whisky makers are open to a reduction, they don’t agree to the scale which the UK has proposed. Indian companies want the duty to be reduced progressively to 50%, and over 10 years.
A tariff reduction for Scotch will not have a significant impact on its retail price in India, Nita Kapoor, the CEO of International Spirits and Wines Association of India, has argued in an ET article. It would remain a high-end premium product. This benefits Indian-made single malt (IMSM) products, as very often Scotch MRPs are used as a barometer of consumer affordability.
The share of Scotch whisky in India’s market is less than 3 per cent while Indian-made whisky holds nearly 97% market share.
Will lower tariffs hit Indian manufacturers?
Indian tipplers consumed roughly 400 million cases in FY23, with demand increasing for all key segments of whisky, brandy, rum, gin and vodka, especially for premium products. That’s about 4.75 billion bottles of 750 millilitres each on average.
The country’s spirits market saw sales volume of 395 million cases during the year to March, a 12% increase over FY22, adding almost 40 million cases from its previous high about four years ago, industry executives said, citing the latest excise department data. Whisky remained the biggest category by far, accounting for two-thirds of the overall spirits demand and grew 11.4% despite a high base.
Companies, however, say rising costs are affecting sales at a mass level while it is getting increasingly competitive in the premium segment. “While the outlook is fairly good for premium brands, there has been a severe cost push pressure which is difficult to offset beyond cutting operating costs,” Rakshit Jagdale, managing director of Amrut Distilleries, told ET recently. “Hence, posting double-digit growth going forward could be challenging and is not sustainable.” Liquor companies have seen a record surge in prices of raw materials such as extra neutral alcohol, glass and packaging materials.
Paul P. John, chairman of Indian single malt and single cask whisky producer Paul John, has said the free-trade deal’s projected tariff reduction would not augur well for the Indian whisky industry. The lower-end Scotch whiskies could affect domestic sales. “If the duty cut impacts lower-end Scotches favourably, this would release the floodgates of low-value Scotch in India, which would affect the Indian alcoholic-beverage industry severely,” he told a London-based magazine ‘The Drinks Business’.
“Earlier, customers used to fulfil their premium liquor requirements either from duty-free shops or from the black market, which had limited availability of brands. This has now been taken care of by high-end liquor stores.” Prem Dewan, MD of DeVans Modern Breweries, told ET recently.
Premiumisation will certainly expand the market for imported Scotch, which is now minuscule compared to that of Indian brands.
However, Mark Kent, the chief executive of the Scotch Whisky Association, does not think Scotch whiskey at lower duties would hit Indian companies. “Even if we were to double, in a market that is growing, you’re not going to see much percentage growth in the Scottish share of the market,” he has told ‘The Drinks Business’. Kent believes that in a growing market there is space for everybody.
The problem over angel’s share
Tariff cuts are not the only issue with whisky trade. There’s another issue that can put Indian manufacturers at great disadvantage, the angel’s share. This refers to the alcohol that evaporates while it is stored in wooden casks for maturation and ageing before turning into whisky. According to legend in the spirits industry, the “angels come and drink their share of alcohol” as it matures in casks housed in dingy cellars.
While the UK is asking for a maturity age of three years for the spirit to be classified as whisky (same as that prevailing in Britain), Indian makers argue that with weather conditions being hotter here, they will lose more than one-third of the whisky due to this condition.
“In Scotland, it is colder than in India and the loss of spirit per year from a barrel is only estimated at 1-1.5%. In India, the weather is hotter and our whisky matures in just nine months compared to their three years. If we keep the whisky in the casks for a longer time, the per year loss due to evaporation and heat is 10-12%, which means in three years we lose roughly around 35% of the spirit stored in a barrel. This is a big loss and will also harm the quality of our whisky. The conditions being dictated by the UK are unacceptable and unaffordable. We are importing to the US, South America, and Africa without any such unfair conditions,” Vinod Giri, director-general of Confederation of Indian Alcoholic Beverage Companies (CIABC), told TOI recently.
The CIABC has made several pleas to the Indian government on the matter as the latter negotiates the FTA and its various provisions with the UK government. “These laws around the maturity of the whisky were made by the British as per their climatic conditions,: Giri said. “To allay their fears over the quality of our products, we are even open to the idea of UK labs testing our whisky if they are concerned about its maturity. Also, we are ready to mention that our whisky is matured in less than three years.”
Under the India-UK FTA, Indian spirit makers also seek a minimum import price of $5 (at cost, insurance and freight level) when international companies are shipping their products to their subsidiaries in India under transfer pricing, to prevent the practice of under-invoicing.
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